Uniformity in GST law | Difficult proposition for govt. to observe the concept of ‘one nation one tax’

Mukul Gupta & Prateek Gupta – [2022] 139 taxmann.com 149 (Article)

Introduction

In the recent Judgment delivered by Hon’ble Supreme Court of India on 19th May 2022 in the case of Union of India v. Mohit Minerals (P.) Ltd. [2022] 138 taxmann.com 331, wherein the Hon’ble Gujarat High Court allowed a petition under Article 226 relating to Ocean Freight challenging the Notification 8/2017 and Notification 10/2017 levying IGST on the Indian importer under Reverse Charge Basis on the freight component in the CIF Contracts of import of goods.

The Indian importers purchased and import through ocean transport goods from outside India on a ‘Cost-Insurance-Freight’ (CIF) basis which is further supplied to domestic industries. The goods are transported by ship from a place outside India, up-to the customs station in India. The Indian importer pays customs duties as well as IGST on the import of goods, which includes the value of ocean freight. In the case of a CIF contract, the foreign supplier engages the shipping company for transport of goods till Indian Customs and as such the freight invoice is issued by the foreign shipping line to the foreign exporter, without the involvement of the Indian importer. The consideration for the Ocean Freight is exclusively paid by the foreign supplier. In the other mutually exclusive scenario, the Ocean freight is paid by the Indian importer only when goods are imported under a ‘Free-on-Board’ (FOB) contract.

The following essential points were laid down by the Hon’ble Supreme Court which are as follows:

a. Ocean freight transaction for Import of Goods under CIF Contracts can be termed as ‘Supply’ under the Indian GST Law
At para 105 of the Judgment it was observed that the Indian importers have contended that the ocean freight transaction cannot be considered as “supply” since Section 7(1)(b) of the IGST Act requires the import of service to be for a “consideration”. The definition of “consideration” in Section 2(31) of the CGST Act is instructive. Thus, Section 2(31) of the CGST Act defines ‘consideration’ to include payment made or to be made, in money or any other form, for the inducement of supply of goods or services to be made by the recipient or by any other person. Thus, in the case of goods imported on a CIF basis, the fact that consideration is paid by the foreign exporter to the foreign shipping line would not stand in the way of it being considered as a “supply of service” under Section 7(4) of the IGST Act which is made for a consideration paid by other person, thereby constituting “supply of service” in the course of inter-state trade or commerce that can be subject to IGST under Section 5(1) of the IGST Act read with Section 20 of the IGST Act, Section 8 and Section 2(30) of the CGST Act.

b. Composite ‘Supply of Goods and Services’ cannot be considered as two segregable ‘Supply of Goods’ and ‘Supply of Services’
The provisions of ‘Composite Supply’ in the CGST Act (and the IGST Act) play a very vital and specific role in the levy of GST. The idea of introducing ‘composite supply’ was to ensure that various elements of a transaction may not be dissected or bifurcated and thus the levy is imposed on the bundle of supplies together as also mentioned in the illustration provided under Section 2(30) of CGST Act. The intent of the Parliament was that a transaction which includes different aspects of supply of goods or services and which are naturally bundled together, must be taxed as a ‘composite supply’. As observed by the Hon’ble Supreme Court “It is true that in this case, the first leg of the transaction between the foreign exporter and the Indian importer is a composite supply, while the second leg, between the foreign exporter and the shipping line may, from a perspective, be regarded as a standalone transaction. Both of them are independent transactions and ordinarily, the IGST could be levied on both sets of transactions – one as supply of goods (under the ambit of composite supply) and the other as supply of services.” It has further been mentioned that however, the Notifications 8/2017 and 10/2017 sought to tax the importer as the deemed recipient of the supply of service. The Indian Importers as a matter of fact urged that-

(i) the Indian importer is not privy to the contract between the foreign exporter and the foreign shipping line;
(ii) the Indian importer does not pay consideration to the foreign shipping line; and
(iii) the Indian importer does not receive any services from the foreign shipping line since the transportation services are provided by the foreign shipping line to the foreign exporter.

The Hon’ble Supreme Court categorically observed that “the Union of India cannot be heard to urge arguments of convenience – treating the two legs of the transaction as connected when it seeks to identify the Indian importer as a recipient of services while on the other hand, treating the two legs of the transaction as independent when it seeks to tide over the statutory provisions governing composite supply. It would not be permissible to ignore the text of Section 8 of the CGST Act and treat the two transactions as standalone agreements.In a CIF contract, the supply of goods is accompanied by the supply of services of transportation and insurance, the responsibility for which lies on the seller (the foreign exporter in this case). The supply of service of transportation by the foreign shipper forms a part of the bundle of supplies between the foreign exporter and the Indian importer, on which the IGST is payable under Section 5(1) of the IGST Act read with Section 20 of the IGST Act, Section 8 and Section 2(30) of the CGST Act. To levy the IGST on the supply of the service component of the transaction would contradict the principle enshrined in Section 8 and be in violation of the scheme of the GST legislation. Based on this reason, it was observed that while Notifications 8/2017 and 10/2017 are validly issued under Sections 5(3) and 5(4) of the IGST Act, it would be in violation of Section 8 of the CGST Act and the overall scheme of the GST legislation. As noted earlier, under Section 7(3) of the CGST Act, the Central Government has the power to notify an import of goods as an import of services and vice-versa. No such power can be noticed with respect to interpreting a composite supply of goods and services as two segregable supply of goods and supply of services.

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